Your chances of getting approved for a home loan are going up! Fannie Mae announced they will allow higher debt limits, up to 50% debt-to-income.
Maybe you’re wondering what debt-to-income limits are? To better understand them, let’s look at a bridge for a second. Imagine you’re cruising through the country side and pull up to a bridge spanning a deep canyon with a raging river at the bottom. Off to the side of the bridge you notice a bright yellow sign that says “weight limit 8 tons.” As long as your vehicle doesn’t exceed that weight limit you’ll safely pass over the rushing waters below. But if your vehicle weighs more than the posted limit, it’s possible the bridge could collapse and you’d fall into the river. The yellow weight limit sign is there to keep you safe from potential danger, especially if you're driving a heavy vehicle.
Your debt-to-income limit, also called DTI, is like the posted weight limit sign. It’s there to help you safely cross the bridge to home ownership. When you’re below the limit, you can drive right over top of dangerous debt and into the driveway of your beautiful new home. Once you go over the posted limit, you put yourself at risk of falling into so much debt that you can’t pay all of your bills.
To determine if your debt-to-income is at or below the safe limit, a loan officer looks at something called a debt-to-income ratio. This ratio divides your monthly debts like credit card payments, a car loan, student loans, and your new mortgage by your gross monthly income. If your debt-to-income ratio falls within the acceptable range of the mortgage lender, you’re still eligible for a mortgage. Previously the acceptable range for your DTI ratio was at or below 45% for a conventional mortgage backed by Fannie Mae. On July 29th 2017 the acceptable limit was increased to 50%.
How much of a difference does that 5% increase make? Let’s take a closer look at it. On a $175,000 mortgage backed by Fannie Mae, you could have an additional $150 in monthly debt and still be eligible. That’s similar to the monthly payment on an $8,500 car loan. So if Fannie Mae hadn’t changed the debt-to-income limits, you would have to pay off the entire $8,500 car loan before you could qualify. Thanks to the debt limit increase, you don’t have to do anything with that car loan to qualify for a Fannie Mae mortgage.
Some experts estimate that Fannie Mae’s debt limit increase could help more than 95,000 individuals qualify for a home loan. Will you be one of them? The bridge to your new home has opened! Give us a call to see how you can safely cross over.